Lady: Nervous?
Striker: Yes.
Lady: First time?
Striker: No, I've been nervous lots of times.
(Hard to believe that Airplane!
Anyway, The Simple Dollar gave an unusual response to a reader who was concerned about having too much weight in stocks in her portfolio:
My philosophy is that the instant an investment makes you nervous, you should pull back into something safer. This is a very conservative approach, but it’s served me incredibly well so far.
I try very hard to avoid giving specific stock advice on here, but I will say that the stock market as a whole has me very nervous right now and I currently do not have a dime in stocks (excepting a small amount that I basically cannot move due to limited investing options, but that amount is in value stocks). Everything else I have in terms of investing is in real estate, bonds, or cash.
This is one response to nervousness in the market: pull back and punt. JLP of All Financial Matters disagreed, and said this among other things in a rebuttal post:
If an investment makes you nervous it’s because you:
- Don’t understand how the market works
- Don’t have a solid asset allocation plan
or, most importantly …
- You don’t have your emotions in check
JLP's advice was to stick out the drop in the market. He notes that the reader (Lily) has twenty years until retirement, which historically has been a good time frame for stock appreciation.
JLP is a fee-only financial planner, so one would think — and his clients would hope — that he knows what he's talking about. In many cases riding out the downs and staying the course is good, and the person who does this is happy about all of the buying when the stocks were cheaper. But I must admit that I'm nervous about the market. I've been nervous for the better part of a year about the market, and I've come to the conclusion that things are not going to be as rosy for stocks as the have been, for quite a while. So when the stock market starts moving big, often in big jumps, yeah, I get nervous. I'm de-allocating stocks as well because I think things are coming to a head.
I'm nervous, and I've acted on that nervousness, but I've already been nervous lots of times. There are valid reasons (darn good ones in my book) why I'm nervous. The nervousness is more “Whoa! It really is starting to happen!” than “Whoa! What's happening?” Now, falling prey to greed and fear is a good way to hand the markets a lot of your money. But is nervousness always ruled by greed and fear? Not necessarily. Nor is it necessarily there because of ignorance or a lack of a plan.
Was Trent's advice right? Was JLP's? I don't know. Were they both at least reasonable responses? I think so.
I'd ask why Lily was nervous. She was nervous for a reason. She at least felt that she had too much of her retirement money allocated in stocks. If she's losing sleep about her portfolio hauling tail under recent three-digit market movements, then maybe she does need to re-assess her tolerance to risk. There's nothing wrong with that, and there's nothing wrong with acting on it, either.
Twenty years or thirty or forty years until retirement doesn't matter; there's never a good time to lose money. I honestly wished that I had been more nervous in 2000 when things started to drop like a rock and I still could have sold at a big gain. I knew that buy and hold was a good strategy, but I didn't know that buy, hold, and sell is a better one. Plenty of people sold near the top; I was instead buying near the top.
If you're nervous about what the markets are doing, that's fine. Just ask yourself why you're nervous before you do anything.
For all the flak that Trent took in his comments (and elsewhere) he's getting an awful lot of link love.
I think you need a healthy balance between confidence and nerves. If you are too nervous you'll probably pull out of a good investment at the wrong time. If you are too confident, you'll probably stay in a bad investment too long.
If you're like me, you just having a really boring portfolio which at best (or worst) will produce average returns, ignore the market and keep going. Apart from reading other blogs, I had no really idea that there was a drop in the stock market, and I still don't know whether we've fared better or worse in the UK than in the US.
If you're pull out of stocks when the market drops because you're feeling jittery, then you either
1 – Don't understand what a "long term" investment means
2 – Had a poor asset allocation for your risk tolerance to begin with
3 – Need to stop watching the daily market fluctuations so closely
or … just need to suck it up and wait it out.
All i have to say is: lollerpants.
I think the thing to consider is that when setting up your initial asset allocation, you should have done so with future bear markets in mind. They are bound to happen. They shouldn't affect your long term plans.
The fact is that if the market was going up, you wouldn't be changing your asset allocation, and that means you are trying to time the market. You are certainly free to do so, but trying to time the market is generally accepted as the biggest trap regular investors fall into. It can kill your returns.
The market has historically always trended upwards when viewed at its cumulative effects. Yes there will be occasional volatile dips and spikes…but it has always recovered. I think if your investment horizon is 10 years+, then you can afford risk…it would take a major world war or nuclear devastation before I'd get nervous or jittery about the market. Dips mean opportunity for me! I actually get excited when the market tanks…bargains!
~Raymond
Money Blue Book
MBH,
I agree with your assessment here. I think both Trent and JLP have valid points. No one should invest in something that causes them a lot of stress, but selling at a low point is a horrible way to invest. I think the best thing the woman can do is educate herself more about her investments and how they are affected by situations such as the current market. While she is fretting about her investments losing value, others are looking at this as a buying opportunity. This should get her attention that there may be something she is missing.
But, it's not for me to say who is right or wrong. I don't know the woman's full situation, and I am not qualified to give recommendations.
You say you would have made more money selling in 2000? Let's start with the numbers. A simple portfolio advocated by Jack Bogle (50% TSM, 25% TISM, 25% TBM) would have returned about +25% over the 2000 peak. If you had correctly timed both the top and bottom, you would have made another 30%. Sounds good in theory. Let's actually look at what happened in fine detail.
Dec 02 -3.3%
Jan 03 -5.9%
Feb 03 -2.8%
Mar 03 +0.7%
Apr 03 +10.0%
So April 2003 was when the market rebounded. Would you have been able to recognize the rebound before it happend? No way — negative/flat growth the previous 4 months — what would have remotely pointed you to then decide to move all your money back into the market in March? At best, you would have moved your money back in *AFTER* this +10% rebound. Remove this +10% month and now your market timing profit is just a mere 16% greater than being in the market the entire time.
Would you have had the guts to go in after just 1 month of gains? What's one month compared to 3 years of losses? There were plenty of big gaining months in 2000-2002:
Mar 00 +7.6%
Jan 01 +6.4%
Apr 01 +5.8%
Nov 01 +5.9%
Sure +10% is larger than any of the top gaining months during 00-02 but there's nothing there that would mark it as any different from any of the fake rebounds. In 2001, there were 3 months of back-to-back-to-back gains before declining again. So perhaps you might have have a target of 5 months of gains before you went back in. The market went:
Mar 03 +0.7%
Apr 03 +10.0%
May 03 +5.6%
Jun 03 +0.5%
Jul 03 +1.6%
We ave a 5 month period with no losses! The market rebound is happening! Move your money in quick! Of course, missing out on this 4 month period now drops your market timing profit over being in the market to 7.5%.
Now let's replay this story on the uptick. After how many months of losses in 2000 would you have finally decided the downturn is happening and it's time to move to cash? In 1998, there was this summer turmoil:
May 98: -2.5%
Jun 98: +2.7%
Jul 98: -2.8%
Aug 98: -14.9%
Woah! Almost 15% loss in one month in 1998! And yet, 1998 still ended up +20%. Would you have correctly been able to determine the difference between the market fluctuations of 98 versus the true bear beginning of 2000? Let's say you have the same threshold of 5 months where 3-4 months are negative.
Sep 00: -6.6%
Oct 00: -1.6%
Nov 00: -7.4%
No need to even do the math here to make the point. If you only had a +7.5% market timing bonus, Nov 00 alone cancels that out.
Finally, let's talk about investment schedule. After moving into cash, would you have kept your investment schedule in place? Remove the new money buying cheap shares 2000-2002 — you're underperforming the oblivious buy-n-holder by a handsome amount. Psychologically, you probably think you did better. But if you actually compared account balances, you'd be shocked to see the difference.
Thanks for the comments everyone!
MossySF: That's quite an analysis. I'll need to process it a little 🙂
AM: At some point there's selling, though. Warren Buffett's optimal holding period is "forever" but at some point one needs to sell. That, and he's a genius. I'm not.